Hyderabad: The power subsidiary of the GVK group, GVK Power and Infrastructure Ltd (GVKPIL), is considering entering the business of manufacturing power equipment in association with a foreign firm in an attempt to cater to the growing demand for turbines, boilers and other machines in India, where almost 70,000MW of generation capacity will be added in the next four years.
“At present, there are no power equipment manufacturers and suppliers who are in a position to deliver power generation equipment within 30 months and we found an attractive business opportunity there,” said GVK chairman G.V. Krishna Reddy.
GVKPIL’s Reddy said global power equipment manufacturers were overbooked for the next 5-10 years even as state-owned and private power producers here are expanding their generation capacities (Photo by: K Sudheer / Mint)
The Hyderabad-based GVKPIL ended 2007-08 with Rs532.14 crore in revenues and Rs135.47 crore in profit, and has interests in power generation, airports, roads, infrastructure and special economic zones.
The company has a power generation capacity of 2,140MW and has set itself the target of increasing this to around 15,000MW over the next 7-10 years. It is currently putting up a generation capacity of 1,080MW.
The entry into the equipment business will help GVKPIL’s own power generation plans.
In the five years to 2007, India missed its target in terms of addition of power generation capacity by almost 49% and experts cite the unavailability of power generation equipment as one reason for this. The demand-supply gap has encouraged several companies to enter the business. Currently, state-owned Bharat Heavy Electricals Ltd (Bhel) has a near-monopoly over the business. It has an annual capacity to make equipment that will generate 11,000MW and has announced plans to increase this to 16,000MW by April 2010.
GVKPIL will not be the first Indian power generation firm to enter the equipment business. The country’s largest power generation firm, the state-owned NTPC Ltd, recently announced two separate joint ventures (JVs) with Bhel and Bharat Forge Ltd to manufacture power equipment. Engineering firm Larsen and Toubro Ltd (L&T), too, announced plans to take up production of power equipment though a JV with Japanese manufacturers Mitsubishi and Toshiba. Chinese power equipment firm Dongfang Electric Corp. (DEC) has also indicated its plans to firm up its local manufacturing arrangements. There have also been reports that the Reliance-Anil Dhirubhai Ambani Group’s Reliance Power Ltd is looking to enter the business. And minister of state for power Jairam Ramesh said in April that foreign equipment makers such as Alstom and Ansaldo Energia had submitted proposals to set up manufacturing facilities here.
Almost one-fifth of the demand for equipment over the next four years is expected to be met by Chinese equipment makers, according to industry estimates. However, as reported in Mint on 28 May, Bhel has raised concerns about the alleged poor quality of equipment supplied by Chinese firms such as DEC, Shanghai Electric and Harbin Power Equipment Co. Ltd. In response to this, India’s apex power sector planning body, the Central Electricity Authority, has formed an internal group to conduct a technical audit of such equipment.
Reddy said that power equipment manufacturers across the globe were overbooked for the next 5-10 years. He added that this comes even as state-owned and private power producers here are expanding their generation capacities. “This is leading to substantial delays in delivery of equipment, resulting in delayed implementation of power facilities in the country,” Reddy said.
According to Shubhranshu Patnaik, an executive director at audit and consulting firm PricewaterhouseCoopers, serious supply constraints have made players such as NTPC, L&T and Bharat Forge consider an entry into the production of power equipment. “The real challenge for the Indian power equipment production players would lie in ensuring cost competitiveness and economies of scale,” he said.
According to him, several foreign power equipment manufacturers that had earlier considered setting up manufacturing facilities in India found that they would not be in a position to compete with the Chinese players or Bhel in terms of cost. “Despite significant import duties and transportation (costs), the Chinese power equipment producers are able to supply their equipment substantially cheaper than Bhel owing to their excess capacities and scale of economies,” Patnaik said.
Bhel had earlier denied that its inability to supply equipment on time was behind India’s inability to meet its power generation target in the five years to 2012.
Shailesh Kanani, analyst with Mumbai-based stock broking firm Angel Broking Ltd said that though India currently has a power generation capacity of 143,000MW, this is not sufficient to meet the needs of the second fastest growing global major economy. He said that the entry into the power equipment business offered an “attractive business opportunity for GVK, given the acute shortage of power equipment”. The success of this diversification “depends on the execution capabilities of GVK and how it sustains engineering, procurement and construction (EPC) business for captive power generation projects and for other independent power producers”, Kanani added.
Reddy said that GVKPIL had already met with some prospective partners, but that nothing has been “finalized yet”. GVKPIL said it is yet to work out the details of the project, but typically a plant that makes machines that can generate 4,000MW of power a year, will need an investment of Rs5,000 crore.
“GVK is already overstretched in its capital expenditure plans... It needs to be seen how effectively the company manages to raise funds for such a venture,” said Angel’s Kanani.